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Italian Banks Plunge as Debt Contagion Risks Push Yields Higher

Aug. 3 (Bloomberg) -- Italian banks, including UniCredit SpA and Intesa Sanpaolo SpA, tumbled in Milan trading as speculation that the country may become the next victim of Europe’s debt crisis pushed the country’s bond yields higher.

UniCredit, Italy’s biggest bank, dropped as much as 4.6 percent, and was down 0.2 cents to 1.13 euros by 10 a.m., giving the bank a market value of 21.7 billion euros ($30 billion). Intesa, the second-largest lender, lost as much as 5 percent, and was down 2 cents to 1.39 euros. The FTSE Italia All-Share Banks Index fell 4 percent to the lowest since Dec. 2008.

European leaders’ agreement last month on a second bailout for Greece and Italy’s subsequent austerity plan have failed to convince investors that the government can avoid seeking outside aid. Italian government bonds slumped, pushing the yield on 10-year bonds 5 basis points higher to 6.13 percent. The extra yield investors ask to hold the securities over 10-year German bunds widened by 39 basis points over the past week to 372 basis points. A basis point is a hundredth of a percentage point.

“Italian banks are hostage to rising bond yields,” Marcello Zanardo an analyst at Sanford C. Bernstein & Co. wrote in a report to clients today. The “market penalizes Italy for its higher public debt and low growth. The market asks for a change in political leadership, one-off measures to lower the debt and structural reforms to increase GDP growth over time.”

Berlusconi will seek to reassure the nation in a national televised address in the Chamber of Deputies in Rome at 3 p.m. today to lay out his plan to boost growth and tame the euro region’s second-biggest debt.

To contact the reporter on this story: Sonia Sirletti in Milan at ssirletti@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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